Dynegy Inc., which started life as the Natural Gas Clearinghouse in the 1980s, would cut the cord on its last tie to the natural gas business with its proposed sale of its extensive midstream natural gas liquids (NGL) asset and marketing network, a move that analysts say could bring in as much as $3 billion. The Houston-based company put its NGL business on the market with an announcement last week.
If the move is successful, Dynegy will become a pure-play power generator that will be able to take advantage of consolidation in the power industry with better focus and a lower cost structure, analysts said.
That's the thinking of Dynegy management as well. "Now that our self-restructuring plan is completed, after careful consideration we have concluded that there are significant opportunities to unlock value for our investors by exploring potential transactions involving our core businesses," said CEO Bruce A. Williamson. "We believe that the market interest that currently exists in midstream energy assets, coupled with high cyclical commodity prices, have created a unique environment that should provide strong value for our midstream business and for the company."
Dynegy's NGL business is centered on Mont Belvieu, TX, along with the oil and gas exploration and production areas of North Texas, the mature Permian Basin of West Texas and southeast New Mexico, and the Louisiana Gulf Coast. Dynegy also has significant NGL transportation and logistics services throughout the United States. The company is engaged in the gathering and processing of natural gas, and the fractionating, storing, transporting, distributing and marketing of NGLs through numerous plants and pipelines. It sells to various end-users, including retail propane dealers, petrochemical facilities, refineries and industrial customers.
As of the end of 2004 the company had processing volumes of 84,000 bbl/d, fractionating volumes of 203,000 bbl/d and was selling 283,000 bbl/d.
"Our business would be a strong addition to almost any existing platform or, alternatively, could form the foundation of a new growth initiative in the midstream energy space," Williamson said.
Moody's Investors Service noted that the NGL business is currently generating about $300 million per year of cash flow, "and at current asset sale multiples in the 8 to 10x range, Dynegy could realize $2.5-3 billion in total proceeds. In addition, Dynegy has a large income tax net operating loss (NOL) position that could shelter virtually all of the gain from the sale of this business. Consequently, Dynegy will be able to sell its midstream business in a tax efficient manner and monetize the value of its NOL."
Following the announcement, an analyst for Motley Fool wrote, "There is no doubt that midstream businesses are hot these days, and limited partnerships and private equity groups are both actively trying to buy more assets in the industry.
"Of course it's impossible to say what sort of offers Dynegy will receive, but many midstream businesses are trading at multiples of earnings...If Dynegy's estimate of 2005 [earnings] for the midstream business is accurate and that valuation holds up, the company could possibly see more than $3 billion in proceeds from a sale."
Moody's said it "expects continued consolidation in the merchant power sector and Dynegy will be positioned to participate in this consolidation."
Moody's and Fitch Ratings both indicated they are reviewing Dynegy's ratings for a possible upgrade. Moody's also indicated that the action "also reflects the continuing improvement Dynegy has made in its post-Enron restructuring, including selling Illinois Power, sales of noncore assets, mitigation of its tolling obligations, including the Sithe acquisition, and the recent settlement of shareholder lawsuits related to Project Alpha."
In announcing its intention to divest the midstream business, Dynegy said it could use the company's tax asset positions to maximize proceeds to the company, and it would independently position Dynegy's power generation business for consolidation and growth.
Dynegy management emphasized that there was no assurance that Dynegy would be successful in divesting the midstream assets, and it noted that the board of directors has not committed to a plan. The company said that it has retained Credit Suisse First Boston in connection with its review of strategic alternatives for the midstream business.
Fitch's move to place Dynegy on a positive rating watch "reflects the likelihood that a monetization of DYN's midstream assets would be favorable for its creditors and could, if completed, result in a rating upgrade later in 2005. Given strong commodity market conditions and high valuations for comparable transactions, DYN's midstream assets have a significant current value."
Separately, Dynegy posted a first quarter loss on charges related to litigation involving Project Alpha and restructured tolling agreements. Dynegy had a net loss of $267 million (minus 70 cents per share) in the first quarter, compared with net earnings of $65 million (14 cents) in 1Q2004.
The year-over-year decrease in net income primarily resulted from two after-tax charges totaling $265 million, including a $156 million settlement of the company's shareholder class action litigation and a $109 million charge associated with restructuring its Independence power tolling arrangement.
"Our three years of self-restructuring came to an end in the first quarter with the successful resolution of legacy issues that, importantly, enable us to now focus on growth opportunities," said Williamson. "By resolving the shareholder class action litigation, we took responsibility for issues related to the past and eliminated the considerable risk that the litigation posed to the company."
The CEO said the quarter was marked by its first growth opportunity, the acquisition of Sithe Energies, which "was a unique and innovative way to create value for our investors by restructuring a significant toll obligation, while strengthening our power generation portfolio in the favorable Northeast market."
Looking ahead, Dynegy narrowed its 2005 guidance, and it now estimates that full-year losses from its core businesses will range between $130-145 million, compared with prior loss estimates of $183-199 million.
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